Emergency funds and insurance: your best bets to prepare for the unexpected

If the past few years have taught us anything, it’s that we can be caught off guard at any time and our lives and finances thrown off balance, no matter what stage of life we’re at.

But as you get closer to retirement or if you’re already there, how do you keep your savings from taking a hit when life throws you a curveball? With the help of Angela Iermieri, financial planner at Desjardins*, let’s see how you can keep from ending up with a bad case of “I should have…”

Something unexpected can change everything

Illness, disability, job loss, separation, accident, injury: we wouldn’t wish any of those things on anyone, but something unexpected can happen at any time and negatively impact your lifestyle and eat up your retirement savings. Although by definition these events are “unpredictable,” there are ways to help you mitigate the impacts. Emergency fund and insurance are two that can help you feel more in control when you’re facing obstacles.

Plan ahead by building up an emergency fund

As Angela Iermieri says, “It’s important to build emergency savings into your budget, so you don’t have to adjust your retirement plans or abandon your goals.”

What is an emergency fund?

An emergency fund is money you can quickly access if something unexpected were to happen and your finances took a hit. Setting up a dedicated savings account for your emergency fund is a good solution. And by choosing a TFSA, you can also grow tax-free savings.

How much should you keep in an emergency fund?

These savings should be enough to cover all of your monthly expenses (rent or mortgage, car, Internet and cellphone, groceries, prescription drugs, etc.) for 3 months, which is about how much time you’d need at the very least to get back on your feet.

Retirees also need an emergency fund

If you’re already retired, you might have limited income or you’ve planned out your investment payout strategy to meet your financial needs as long as possible. Which means that if something unexpected were to happen, you might be quickly forced to reduce your lifestyle. Because the pensions you receive from the government are fixed and your access to financing is sometimes limited, you might have to dip into your savings if something happened. That’s why you’re better off having an emergency fund to turn to. Plus, this buffer could help you keep your finances on track in the short term as inflation continues to rise.

To build up your emergency fund, think about cutting back on some of your regular expenses, postponing certain goals or even finding a part-time job.

The key word here is “emergency.” Here’s what you want to avoid:

Using your emergency fund for impulse spending, which means you could be caught short if a real emergency arose.
Using your credit card or line of credit like an emergency fund, which could put you into more debt.

To build up your emergency fund, think about cutting back on some of your regular expenses, postponing certain goals or even finding a part-time job.

Give yourself peace of mind with insurance

Have you reviewed your insurance coverages lately? You might want to, because even if things are going well, an accident or illness can happen to anyone at any time.

Already retired?

You should maintain your health insurance coverages after you’re retired. They could help reduce financial stress due to health issues. And the good news is that your insurance premiums are tax-deductible medical expenses.

A few tips to help you better prepare

Maintain flexibility	When you’re planning your withdrawal plan for your savings, make sure you can access some of your investments at any time with no penalty. And also make sure to review your payout plan after any big life change or when you’re planning new goals.
Think before cashing in your investments	If you’re thinking of selling some of your investments, be sure to evaluate the long-term impact and implications on your retirement plan. That includes the fact that all RRSP withdrawals are taxable, which leaves you less money at the end of the day.
Make your health a priority	Regardless of your medical history, you should consider private or public health and drug insurance for your particular needs. Also check if your group insurance through work can continue after you’re retired.

Maintain flexibility	When you’re planning your withdrawal plan for your savings, make sure you can access some of your investments at any time with no penalty. And also make sure to review your payout plan after any big life change or when you’re planning new goals.
Think before cashing in your investments	If you’re thinking of selling some of your investments, be sure to evaluate the long-term impact and implications on your retirement plan. That includes the fact that all RRSP withdrawals are taxable, which leaves you less money at the end of the day.
Convert your RRIF to an emergency fund	When you turn 72, you’ll have to make the minimum withdrawal from your RRIF every year. If you don’t need all of it to balance your current budget, put it in a TFSA or another investment vehicle that can be easily converted to cash.

By re-evaluating your insurance needs, you could learn of various types of coverages, like disability insurance or health insurance, that can help you get back on your feet after a setback. You’ll be better equipped and have more peace of mind to fully enjoy your retirement.